Marrone Bio Innovations, Inc.
Q2 2018 Earnings Call Transcript

Published: 14 Aug 2018

[Operator:]

Good day, and welcome to the Marrone Bio Innovations Second Quarter 2018 Earnings Conference Call. Today's conference is being recorded. At this time, I’d like to turn the call over to Linda Moore, General Counsel. Please go ahead.

[Linda Moore:]

Good afternoon everyone and thank you for joining our call. Before beginning, I would like to remind you that this conference call may contain statements regarding management's expectations, hopes, beliefs, intentions or strategies regarding the future as well as projections, forecasts or other characterizations of future events or circumstances. Such statements are based on management's current expectations and beliefs concerning future developments and their potential effects on the company. There can be no assurance that future developments affecting the company will be those that management has anticipated. Such statements involve a number of risks and uncertainties, some of which are beyond management's control, or other assumptions that may cause actual results or performance to be materially different from those expressed or implied by these statements. Important factors that could cause differences are contained in the reports filed by the company with the Securities and Exchange Commission, including under the heading Risk Factors and elsewhere in the company's quarterly report on Form 10-Q for the second quarter of 2018 and in our earnings release posted on the company's Web site. Should one or more of these risks or uncertainties materialize or should any of management's assumptions prove incorrect, actual results may vary in material respects from those discussed today. Any guidance that management may offer in this conference call represents a point-in-time estimate. The company expressly disclaims any obligation to revise or update any guidance or other forward-looking statements to reflect events or circumstances that may arise after the date of this call. After our remarks, we will hold a question-and-answer session. I will now turn the call over to our Founder and Chief Executive Officer, Pam Marrone. Pam?

[Pam Marrone:]

Thank you, Linda. Good afternoon and thank you to everyone for joining us. With me today is Jim Boyd, our President and Chief Financial Officer; and as you just heard, Linda Moore, our General Counsel. In the second quarter of 2018, we continued to build our company’s infrastructure and executed upon our business plan. As the CEO and Founder of Marrone Bio Innovations, I’m confident about our growth opportunities and the future of our company. We have seen progress in the following areas. First, we have eliminated a vast majority of our debt and ended the second quarter with almost 25 million in cash, cash equivalents and restricted cash which should give us sufficient resources to fund operations as currently planned for the foreseeable future. With our stronger balance sheet, customers, distributors and growers can purchase our products with confidence. Second, we continue to move our pipeline ahead and commercialize innovative new products. As you know, we launched Haven Sun Protectant in March of 2017 and Stargus biofungicide in December. We launched Zelto bioinsecticide/nematicide, our first turf brand in January of 2018 and Amplitude biofungicide this spring. Most recently in June, we launched our CG brand of Regalia, Venerate and Grandevo into the Cannabis and home and garden market, a significant opportunity. In the first few days of August, we submitted the registration of MBI-014 bioherbicide to the EPA. Third, global field trials have come back very promising in key areas, including Europe, Central and South America, Turkey, South Africa and other intense pesticide markets worldwide. Fourth, we have expanded our commercial team around our appointment of Kevin Hammill as our Chief Commercial Officer. We have added a new territory in eastern Washington to serve the tree fruit market as well as in Idaho, Utah and Montana to provide crop protection solutions for potato and dry beans. Dry beans is a completely new segment for MBI. In addition, we have added new marketing resources for communications and sales support. While first half sales were affected by negative rumors about the company, the related loss of several members of our sales team in late 2017, dry weather in California and lingering effects of the hurricane in Florida, we continued our operational execution which included several positive and noteworthy events as follows. We submitted the MBI-014 registration package to the EPA. Some of you are aware that MBI-014, the company’s first entry into the 20 billion weed-killer market. This is a significant milestone for MBI and we hope for the food industry in general. The company has significant work to do on the art of use such as used rate, water volume, adjuvant and combinations of chemicals but we are keenly focused on moving this important new product into the marketplace. We launched the CG brand of Regalia, Venerate, Grandevo into the cannabis and home garden market. Regalia, Grandevo and Venerate have been cleared by many key states for use on cannabis crops. Note that both California and Colorado do not allow synthetic chemicals on cannabis leaving pest management purely to biopesticide. By the end of the year, California is required to develop a certified organic label for organic cannabis, an important label for California’s consumers. We expanded MBI’s international distribution network by signing a new distribution agreement with Lidorr Chemicals in Israel and are finalizing one in Vietnam. Vietnam is an intensive pesticide market where growers are actively adopting biological to manage residues for exported crop. We had a successful first commercial demo of MBI-601 biofumigant which we’ve branded Ennoble with an organic strawberry grower. We calculated a net profit of $3,000 per acre due to the yield increases. We’ve recently received a U.S. patent for the use of one of our pipeline bioherbicides, MBI-005, for control of key weeds in rice and turf, strengthening MBI’s total intellectual property portfolio to more than 400 issued and pending patents. In 2017, one of our microbes was successfully launched via our strategic partner, Albaugh, into the row crop seed treatment market which has been very well received this growing season. Data coming in from international territories show outstanding results. In Guatemala, Regalia in a program showed strong results against coffee rust yielding a higher number of berries per acre. In Honduras, Guatemala and Panama, Regalia increased onion size, increased sugar or brix on sugarcane, yielded more cucumbers and improved the health of citrus trees hobbled by HLB or citrus screening. In Mexico, Chile and South Africa, Grandevo and Venerate trials came back positive, a particularly notable trial involving Grandevo on spotted wing Drosophila showed a 94% mortality rate and a complete stoppage of egg laying and hatching. Grandevo and Venerate performed similarly to the standard on thrips and mites on avocados in Mexico. In Chile, Venerate performed as well as the chemical standard against two important Levo pest [ph] of grapes, blueberries and hazelnuts. Grandevo was as good as the chemical standard against grapevine mealybug, San Jose scale and thrip. In European trials, Majestene controls nematodes and increased yields as well as the standard brand Vydate on cucumber and tomato. Inside the United States, we saw the following exciting results. In trials with beekeepers, Grandevo controlled hive beetles and Venerate controlled Varroa mites without any negative effect to adult bees and brood. Ennoble biofumigant continues to increase yield as well as the chemical standards on the range of crops such as strawberry, leafy greens and celery. Cornell researchers have shown impressive results with Regalia on fire blight trees treated in 2017, showed continued protection against blights in 2018. Stargus was tested for the first time on blossom fire blight on apples and post-bloom fruit drop on citrus, both with positive results. Stargus enhanced the conventional downy mildew lettuce program in California while Majestene outperformed the Vydate brand on carrots. On the commercial front, we continue to focus on increasing demand at the grower level. This quarter, we were visited by a number of large growers that were seeking ways to integrate our products into their pest management and plant health programs. We also have had several meetings with regulators, large food and beverage companies and commodity groups who have requested our help to increase the sustainability of their growers’ suppliers in their integrated management program. Because of this increased activity, we believe that the awareness of biological and integrated programs is growing. A recent court ruling restricted chlorpyrifos. We have been working at the request of the California Department of Pesticide Regulation to help develop shovel-ready alternatives to chlorpyrifos using our current products with others in integrated test management programs. In the second quarter of 2018, manufacturing and R&D made the following contributions; a favorable product mix combined with R&D, margin improvement work and manufacturing efficiency efforts continued to increase growth margins which grew 850 basis points to 47.3% in the second quarter when compared to the prior year. We successfully trialed an improved production process for Grandevo in our Michigan plant. Also in our Michigan plant an automatic filling and packaging line has been installed, improving efficiency and gross margins. We view all of these as significant accomplishments in the second quarter. As noted previously, we now have six EPA approved biopesticide products and one biostimulant product on the market. The fact that our products are based on natural product chemistry and that most of our products are not living microbes like most other biopesticide products puts us in a stronger position and makes our products more robust in terms of efficacy, ease of use, shelf life and broad spectrum. But before going further, I would now like to turn the call over to Jim to go through the numbers and provide additional detail on our financial performance. Afterwards, I’ll walk you through some of our other strategic initiatives for the balance of 2018 before wrapping up the call with Q&A. Jim?

[Jim Boyd:]

Thank you, Pam. As noted, I would like to walk you through our second quarter 2018 results. Revenues for the second quarter of 2018 totaled $5.8 million compared to $6.5 million in the second quarter of 2017 and compared to $4.3 million in the first quarter of 2018. Revenues for the first half of 2018 were $10.1 million compared to $10.6 million in the first half of 2017. As a result of the new revenue recognition standard ASC 606, year-over-year reported revenues are not strictly an apples-to-apples comparison. For the 2017 numbers, we use the old sell-in and sell-through revenue recognition method. If we use the same revenue recognition method in 2018, revenues in Q2 2018 would have been approximately $0.5 million higher or $6.3 million in Q2 of 2018 compared to $6.5 million in Q2 of 2017. The first half of 2018 compared to the first half of 2017 would have been approximately flat. We believe revenues in the first half of 2018 were affected by rumors regarding our ability to continue operations prior to our comprehensive stock and debt restructuring transaction in February. This earlier year uncertainty combined with the low disease pressure in a key market and lingering effects from the hurricane in the Southeast impacted our ability to grow more robustly in the first half. Our February and April financial transactions fortified our balance sheet and we have filled all but one of the commercial team vacancies we launched late in 2017. Gross margins in the second quarter were 47.3% compared to 38.8% in the second quarter of 2017. Second quarter gross margins benefitted from a favorable product mix as well as process and manufacturing improvements. We expect to see gross margin increases over the lifecycle of each of our products and to improve as production processes improve and as we continue to increase yields and potency and implement efficiencies in our manufacturing. SG&A in the second quarter decreased 7% to $4.7 million compared to $5.1 million in the same period last year. R&D expenses in the second quarter decreased 13% to $2.5 million compared to $2.9 million in the second quarter of 2017. We remain intensely focused on managing our operating expenses. We expect our operating expenses to be approximately flat in all departments with the exception of sales and marketing, which will be up slightly in 2018. We are investing in sales and marketing by putting more boots on the ground which should increase grower demand, develop new customers, as well as expand business with existing customers. That said, we were able to decrease our total OpEx in the second quarter by 9% to $7.2 million compared to $7.9 million in the second quarter of 2017 and decrease total OpEx by almost $1 million in the first half of 2018 over the first half of 2017. Interest expense in the second quarter of 2018 was $400,000 compared with $2 million in the second quarter of 2017, a reduction of $1.6 million for the quarter and is a good indication of the savings associated with the debt restructuring transactions that we closed in the first quarter of this year. Now, turning to the balance sheet. Total cash and cash equivalents, including restricted cash, was $24.9 million as of June 30, 2018 as compared to $16.8 million as of March 31, 2018. In April of 2018, the company completed a public offering of our common stock generating approximately 12.7 million in net proceeds. This combined with the last quarter’s financing and debt restructuring transactions were transformative to the point we believe we have sufficient resources to fund operations as currently planned for the foreseeable future. Now I’d like to explain some nonrecurring items on our balance sheet. The 3 million reduction in deferred costs of product revenues in current assets plus the $5.8 million reduction in deferred revenues in current liabilities plus a $500,000 increase in long-term deferred revenues resulted in a $2.3 million increase in stockholders’ equity, all due to the adoption of ASC 606. And now I’d like to turn the call back to Pam for a discussion on some of our initiatives for the remainder of the year.

[Pam Marrone:]

Thank you, Jim. We have made good progress on key strategic goals and operations and I want to highlight where our focus will remain for the balance of 2018. On the commercial front, we expect continued concentration on grower demand creation, including on on-farm demos to build awareness as well as expand our label uses; developing specific crop-based integrated programs to expand uses of our key products in preparation for the 2019 season; targeted placement with leading organic feed companies of our Biostacked seed treatment with groundwork BioAg. And in international, we expect approval for the use of Regalia on cannabis in Canada; to sign at least two more international distribution agreements in key global markets; several international regulatory submissions such as South Africa, Kenya, Europe, Brazil, Ecuador, Canada, Australia and New Zealand; several international regulatory approvals including Morocco, Philippines and Canada. Operationally, we anticipate continuing our work to add Venerate and Majestene production to our Michigan facility; continued gross margin improvement over the longer term as R&D and manufacturing initiatives continue to increase efficiencies and yield. In summary, we remain laser-focused on commercial execution and continuing to build a high performance sales and marketing team. As previously mentioned, we are also focused on increasing our presence with key large growers and strengthening our channel partnerships, all the while building our longer-term vision of being the market leading biological company through our own products combined with other potential synergistic products and technologies. With that, I’d like to now open the call for questions. Operator?

[Operator:]

Thank you. [Operator Instructions].

[Operator:]

I’ll now turn the conference back over to management.

[Pam Marrone:]

Thank you, operator. In closing, I want to thank each of you for joining us today. And we sincerely thank our dedicated and committed employees, board members, suppliers, partners, debt holders, shareholders and customers for the confidence they have placed in us. We recognize the tremendous responsibility we have to realize MBI’s significant potential as a leading force in the adoption of biological in global crop protection and sustainable food production practices. We continue to conduct road shows and attend conferences on both coasts. If you are interested in a meeting, please contact management or our IR firm, MZ Group, to arrange. We look forward to updating you on our progress as we move forward with a number of key initiatives to build shareholder value over the longer term. Thank you.

[Operator:]

Thank you. That does conclude today’s conference. We do thank you for your participation today.